Lower Prices, Bargain Hunting Send Safeway's Profit Down 9%

Lower prices for meat and food staples, as well as consumers forsaking fancier labels for cheaper brands, caused profit at Safeway Inc. to slide 9% in its fiscal third quarter, the company said Thursday.

The nation's third-largest supermarket chain, which operates under the Vons name in Southern California, reported profit of $281.3 million, or 60 cents a share, compared with $309.2 million, or 60 cents, a year earlier.

Sales rose 1.2% to $8.1 billion for the period ended Sept. 7.

The Pleasanton, Calif.-based company, which operates nearly 1,800 supermarkets, matched Wall Street's expectations, lifting its stock $2.91 a share to $23.50 on the New York Stock Exchange.

The fact that Safeway met or narrowly beat analysts' estimates was one reason the stock rose Thursday, said Jonathan Ziegler, an analyst with Deutsche Bank in San Francisco.

"Folks expect companies in this industry not to be able to make their numbers, so they get rewarded when they do," Ziegler said.

Safeway said it expects fourth-quarter profit to increase to 84 cents a share, the average estimate of analysts surveyed by Thomson First Call. It earned 70 cents in the year-earlier period.

Ziegler, however, noted that Safeway repurchased $918 million of its stock during the quarter, which helped push its per-share earnings ratio to match or beat estimates.

He predicted that unless profit increases, the chain would have to continue to repurchase shares to keep meeting its targets.

Safeway has repurchased $2.8 billion of its stock since 1999, and its board has authorized the repurchase of as much as an additional $730 million.

"The numbers really do not look great, and the sales are not where they should be," Ziegler said.

Comparable-store sales, a key measure of a retailer's health, fell 0.7% in the quarter.

In a conference call with analysts, Safeway executives blamed the results on lower prices for meat and other food, compounded by consumers favoring lower-priced brands. That has resulted in lower average sales receipts at the checkout stand.

"There continues to be evidence that people have traded down" to save money, said Steven Burd, Safeway's chief executive.

Some consumers, he said, are buying hamburger rather than steak, meal stretchers such as potatoes and other low-cost foods such as rice and pasta.

"I think that the economy got a little tougher during the quarter," he said, adding that the period started stronger but declined as September neared.

At the same time, discounters such as Wal-Mart Stores Inc., Costco Wholesale Corp. and Target Corp. are continuing to steal market share from traditional supermarkets.

Wal-Mart, Sam's Club and Costco stores are relentless, Ziegler said, in driving down prices on nonfood products such as cleaning supplies and other household staples that also are found on supermarket shelves, making it difficult for grocery chains such as Safeway to raise prices and profit margins.